More tax headaches for U.K. film industry

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LONDON -- The U.K. tax authorities appeared set to spoil another weekend for the film industry Friday as they unveiled a further clampdown on rules used by individuals in limited liability partnerships to offset losses against tax.

Production lawyers and accountants alike will be pouring over the Revenue and Customs brief published Friday, which limits the trading loss threshold to just £25,000 ($48,000) for such partnerships involving high net-worth individual investors.

Sources close to Revenue and Customs made it clear that while the latest move was not aimed at the film industry, it will likely affect it.

Movie production financiers specializing in film financing models here include such companies as Ingenious, Scion, Future and Prescience.

Ingenious commercial director Duncan Reid said reports of the move being an attack on so-called GAAP (General Accepted Accounting Practices) schemes were overblown. "It is not an attack on GAAP financing in any way," Reid said.

But he did say the move will have an "effect on the levels of investment in all the creative industries in the U.K." and not just the film industry.

"Investing in film is a risky business, so anything offering tax relief on potential losses is a good thing," he said. "Losing that will mean the levels of investment will change. But the commercial structure of Ingenious Film Partners will remain in place."

Ingenious is one of the biggest players in behind-the-scenes movie financing here, gathering equity cash through various mechanisms for a host of productions, including "Alien Vs Predator," "Vanity Fair," "X-Men: The Last Stand" and "Shaun of the Dead."

Elsewhere, Scion chief Jeff Abberley was conducting a hurriedly put-together conference call with U.S. partners to discuss the possible implications of the new rules.

A U.K. Film Council spokesperson said Friday that the government's move simply reflects a desire to stop investors from avoiding tax rather than to prevent people from making movies.

But the jury is still out on whether or not the impact of the changes will be felt as hard as early reports seemed to indicate.

With such complex structures involved in film financing in the U.K., some observers say the changes could mean that the sudden and immediate introduction of the new limits might leave productions that are about to lens with a giant hole in their budget.

The Inland Revenue said on its Web site that the new limit "will apply to trading losses sustained as a non-active partner on or after March 2."

The move, according to insiders, almost certainly removes a stream of cash from high net-worth individuals flowing into movie productions. "It doesn't matter if that cash came because someone wants to avoid tax, it was still being used to fuel production," one insider said.

A spokesman for the U.K. Film Council said that the Inland Revenue move might have as big an impact as the sudden clampdown on tax funds in early 2004, which saw financiers and producers attending the Berlin Film Festival reel from the effects (HR 2/10/04).

But movies accessing outgoing sales and leaseback arrangements, under transitional arrangements as the new tax credit system becomes established, will not be affected.
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